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Satyam: Good performance, but...

Oct 17, 2008

Performance summary

Topline grows by 7.6% QoQ during 2QFY09 on account of higher volume growth.

Operating margins decline by 1% QoQ during 2QFY09.

Net profits grow by 6% QoQ during the second quarter of the fiscal.

Management has revised estimates of FY09 revenue growth (under Indian GAAP) upward to the range of 33% and 35.4% YoY.

EPS is expected to grow in the range of 33% to 35% YoY.

Attrition rate falls to 12.3 % from 12.6% in the previous quarter.

Consolidated financial performance

(Rs m)

1QFY09

2QFY09

Change

1HFY08

1HFY09

Change

Sales

26,208

28,193

7.6%

38,619

54,401

40.9%

Expenditure

19,886

21,684

9.0%

30,489

41,569

36.3%

Operating profit (EBDIT)

6,323

6,509

2.9%

8,130

12,832

57.8%

Operating profit margin (%)

24.1%

23.1%

21.1%

23.6%

Other income

331

796

140.3%

1,737

1,127

-35.1%

Interest

57

132

130.1%

75

190

152.7%

Depreciation

467

645

38.1%

778

1,112

43.0%

Profit before tax

6,130

6,528

6.5%

9,015

12,658

40.4%

Tax

653

720

10.3%

1,141

1,372

20.3%

Minority interest

-

-

-

-

Profit after tax/(loss)

5,477

5,809

6.1%

7,874

11,286

43.3%

Net profit margin (%)

20.9%

20.6%

20.4%

20.7%

No. of shares (m)

668.5

673.4

Diluted earnings per share (Rs)

30.1

P/E ratio (x)*

9.3

* On a trailing 12-months basis

What has driven performance in 2QFY09?

Satyam recorded a 7.6% QoQ growth in topline for 2QFY09 mainly driven by 4% QoQ growth in volumes. The company has revised estimates of FY09 revenue growth to the range of 33.0% to 35.4% YoY from an earlier projected 32.0% to 34.1% YoY. The company has also projected its EPS to grow by 33% to 35%. The revised estimates are primarily based on the depreciation of rupee against the US dollar.

Based on verticals, the TIMES (telcom, infra, media, entertainment, semiconductors) segment registered maximum growth of 16% QoQ during 2QFY09. This was followed by manufacturing (grew 8% QoQ), Healthcare & pharma (grew 6% QoQ) and BFSI segment (grew by 3%). However, the Retail transport & logistics vertical registered a decline of 4% QoQ during 2QFY09. It should be noted that amidst financial crisis in the US and UK, Satyam has been able to grow its revenue from the BFSI segment, albeit marginally.

Revenue by industry vertical

1QFY09

2QFY09

Rs m

% of total

Rs m

% of total

Change

Insurance, Banking and Financial services

5,603

21%

5,780

21%

3%

Manufacturing

6,046

23%

6,558

23%

8%

TIMES

5,740

22%

6,654

24%

16%

Healthcare and Pharma

1,850

7%

1,954

7%

6%

Retail, Transportation & Logistics

2,741

10%

2,644

9%

-4%

Others

4,227

16%

4,601

16%

9%

Total

26,208

28,193

8%

*TIMES (telcom,infra,media,entertainment,semiconductors)

Based on service offerings, the Application development and maintenance segment showed the best performance and grew by 9% QoQ during 2QFY09. This was followed by consulting and enterprise business solution which grew by 7% QoQ during the quarter. This segment accounted for 44% of revenue. Growth in this segment indicated that Satyam is growing its high end offering and climbing up the value chain.

Revenue break-up by service offerings

1QFY09

2QFY09

Rs m

% of total

Rs m

% of total

Change

Application development and maintenance

11,697

45%

12,707

45%

9%

Consulting and Enterprise Business Solution

11,715

45%

12,535

44%

7%

Extended Engineering Solutions

1,782

7%

1,892

7%

6%

Infrastructure Management

1,014

4%

1,060

4%

5%

Total revenues

26,208

28,193

8%

Satyam’s operating margins declined by 1% QoQ in the second quarter. This was mainly on account of lower utilisation of domestic employees and marginally lower billing rates as compared to previous quarter. The attrition level fell from 12.6% in 1QFY09 to 12.3% in 2QFY09 (on TTM basis).

Satyam recorded 6% QoQ growth in bottomline during 2QFY09, which was aided by higher other income. However, higher interest expenses have eaten into the additional other income.

What to expect?

At the current price of Rs 280, the stock is trading at a multiple of 7.7 times our estimated FY11 earnings. The management is cautious about the current scenario. In its conference call yesterday, the management indicated that the company will be able to grow topline on account of higher volume and favorable movement of rupee. The management has also indicated that though there is some pressure on the pricing from clients’ side, it expects pricing to be stable in coming quarters. The management is optimistic about growth in its engineering service and manufacturing business. However, considering our broader view of the management and the past volatility in the company's performance, we would take these indications with a pinch of salt. At these levels, while valuations of the stock look attraictive, we believe there are other better options in the software sector.

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